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The Ultimate Bear Market Guide: Investing Strategies for Beginner, Middle and Advanced Crypto Players

Read this article in 19 Minutes

If you want to beat the bear market, you must first learn the "bear market thinking method".

Original title: "How to Survive a Crypto Bear Market"

Original author: frogmonkee, Bankless

Original compilation: Katie Koo, Odaily Planet Daily

In a bear market, market conditions are depressed. It is easy to lose faith, be driven by fear, and only invest for the short term. These impulsive decisions will cost you. Therefore, we must first determine what the goal is, what investment principles to follow, and what the portfolio management strategy is.

This article will provide beginner, intermediate and advanced crypto traders with strategic advice to put you in the best position for the next bull market.

First, are we in a bear market?

Let's align the basic definitions first. According to Investopedia:

"A bear market is defined as a market that experiences prolonged price declines. It generally describes a situation in which securities prices fall 20 percent or more from recent highs due to widespread investor pessimism and negativity."

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The market capitalization of cryptocurrencies peaked in early November last year at just under $3 trillion, according to CMC. At press time, cryptocurrencies are worth around $1.25 trillion.

We are certainly in a bear market in my view. It's not up to you or me to decide. At this point, instead of rushing to dismiss the recent price action as a bear market, ask yourself, does this feel like a bear market? It depends on how you choose to read market sentiment

As I've been betting wildly on cryptocurrencies, I've noticed a marked drop in enthusiasm. Fewer people are following new NFT projects or taking risks with small-cap tokens, and more people are converting their assets into ETH, BTC or stablecoins.

Three Guiding Principles of a Bear Market

A bear market is an opportunity. Nobody wants a bear market, but if you handle it right, you can benefit. Smart investors can steadily accumulate assets in a bear market and earn huge returns in the next bull market.

Live. This is your goal. In a bull market, your goal is to accumulate wealth and make a profit. In a bear market, your goal is to survive the next bull market while losing as little of your equity as possible. If you focus on growing your income during a bear market, you face an uphill battle. I recommend focusing on preserving your net worth and weathering the start of the next bull market cycle. Buffett's investment strategy is useless in a bear market.

Keep it simple, keep learning. In the ecstasy of a bull market, it's easy to look like financial geniuses. In a bear market, your strategy will be stress tested. So, keep it simple, and trust your strategy for the long term.

Assess your risk profile

Before we discuss any strategies, I want to talk about portfolios. A venture portfolio is a tool investors use to determine whether an investment fits their risk appetite. Here are some representative examples:

Under aggressive risk appetite:

Predominantly small cap Token , some BTC and ETH, excluding stablecoins;

Willing to use an unaudited protocol;

Invest in dozens of different projects;

Under moderate risk appetite:

Mainly BTC and ETH, with some stablecoins and small caps Token ;

To pledge in a pool with higher returns, you must first understand the protocol;

Use a small portion of the portfolio to keep up with projects;

Conservative risk appetite:

All in BTC, ETH and Stablecoins;

Pledge the stable currency in the composite market to earn a low single-digit rate of return;

Hold no more than 5-10% of your net worth in cryptocurrencies.

For a bear market, I recommend choosing between a conservative and a moderate risk portfolio, as a more aggressive risk portfolio is an excessive pursuit of an unknown bull market.

Remember, in a bear market, our goal is to get our portfolio into the next bull market intact.

Bear Market Survival Strategy

Junior Crypto Players - DCA (Dollar Cost Averaging) and Hold.

Target audience:

Experiencing a bear market for the first time;

New to investing and financial markets;

Have a full-time job that has nothing to do with encryption.

The premise of a beginner's strategy is simple: choose a portfolio of low-risk assets, invest your budgeted amount regularly, and forget about other unrealistic thoughts until the market heats up.

This strategy has two steps:

Determine which assets you want to own;

Transfer dollar cost averaging into these assets and hold.

Asset Configuration

The first step in this strategy is to determine which assets you want to own. These assets will be a staple of your portfolio until the market starts to heat up.

When making choices, it is helpful to have a risk profile. Ideally, you'll allocate a significant portion of your portfolio to blue-chip assets that you know will rise in the next bull market -- such as Ethereum and Bitcoin.

The image below has some examples of asset allocations for different risk profiles (not an endorsement by Bankless).

(This table is only an example of configuration methods under different risk preferences, made before Terra crashed, non-standard selection reference)

Dollar cost averaging

Once you have decided on your portfolio allocation, the next step is to budget how much you want to invest in these assets on a regular basis. This strategy is one of the most basic investing strategies and is known as Dollar Cost Averaging (DCA).

The beauty of DCA is that it removes the cognitive burden of market timing. The premise is simple: buy at the same time each period (say once a month). Ignore the price, just buy it.

Just prepare and forget about them, come back and check your portfolio during the next bull market and reap the rewards of your steadily accumulating blue chip capital assets.

Intermediate Crypto Players - Investing in Index and Sector Rotation

Target audience:

Tried a variety of DeFi protocols;

Slightly risky;

Have time to focus on the market.

The intention behind this strategy is to diversify your holdings, thereby hedging against market volatility and capitalizing on small bull market bubbles in bear markets.

Diversification

Any sound investment advice starts with diversifying your portfolio risk and limiting your risk in any one asset class. The above asset allocation chart is an example of investment diversification, but we need to further strengthen investment diversification.

specific Token Diversification is one thing. What about the index? Index is a basket Token , which means they represent a microcosm of diversification itself. For example, the DPI of Index Coop, a decentralized and autonomous asset manager Token Bring blue chips to DeFi Token caught in a single basket Token In , spread the risk and return of the tested DeFi protocol to multiple Token middle.

If you are considering diversifying your portfolio, look at indices, not individual Token . Index Coop has many different products, but that can be found in many other categories on the tokenset, and you can even create your own category.

Once you choose a category you like, you can DCA (dollar cost averaging) it.

Investment sector

Many indices are broken down into sectors, which represent a basket of specific markets Token :

DPI = blue chip DeFi Token ;

MVI = Metaverse project;

DATA (data) = data economy.

In all types of markets, some sectors outperform others. For example, when comparing MVI, DPI, and ETH, we can see that ETH performs better in the long run. In other periods such as September to December, MVI is ahead of ETH and DPI:

This is the first time the crypto industry has seen such a massive bear market. In 2018-2020, there is no DeFi or Metaverse to segment the market yet. Because of this, there is also no data showing which sectors will outperform the overall market average.

A detailed mid-level strategy will accommodate how to invest in sector rotation, including what to consider within a sector Token , which indicators to follow, how to set stops and alerts. If you have time to watch the market, rotating in and out of stable sectors throughout a bear market is a good way to stay afloat, if not make a small profit.

Advanced Crypto Players - Defensive Options Trading

Target audience:

Have a financial or self-taught background;

Familiar with options;

Bear market veteran player.

I generally do not recommend actively trading in bear markets. Trying to profit in a bear market is riskier than in a bull market. Defensive trading is a set of market trading principles centered on limiting losses and volatility. Common strategies include diversification, sector rotation, DCA, and holding.

To use these strategies, you need to find an options exchange that supports the asset you want to short.

Some popular native DeFi options exchanges:

Opyn;

Dopex;

Ribbon Finance;

Hegic...

Pairing Put Options (Protective Put)

Purchasing paired put options is a hedging strategy that uses options to limit downside risk while going long on an asset.

By buying a put option on the underlying asset you own, you are in effect buying an insurance policy that puts a price floor so that you won't lose any more money even if the price of the underlying asset continues to fall .

Covered Call

Covered calls are another options trading strategy that sacrifices potential upside to earn a current income stream.

A covered call requires you to hold the underlying asset and sell a call option to buy that asset at a fixed price. In a bear market, this works to your advantage because asset prices are likely to remain stable over the life of the option, allowing you to earn premium income by selling calls.

However, if the underlying asset appreciates beyond the strike price, your earning potential is limited.

Bear Spread

The carry trade is a common options strategy that limits your profits and losses to a limited range. They buy one type of collateral at one strike price and sell the related collateral at another strike price.

There are two types of short spreads: put spreads and call spreads. Both strategies work in the same way: buy an option at the strike price and sell the same amount of options at the lower strike price. In doing so, these spreads create limited profit and limited loss trading strategies for moderately bearish investors.

Lessons from the Bankless team

If this is your first bear market, here are some lessons from the Bankless team from 2018 to 2020:

1. Consider the long term. Don't stare at the market every day. Be mentally healthy, pick a strategy, follow it, and forget about numbers. It will pay off in the long run.

2. Remember your goal. survive. If you are experiencing FUD, remember that everyone feels FUD when they are bears. Put it aside, stay conservative and wait for the bull market.

3. Invest your time. Speculators and retail investors leave in a bear market, but builders stay. If you take the time to contribute to the project, you are sure to make meaningful connections and maybe even gain an edge before the next bull market. To learn and improve yourself.

4. Become an encrypted user. Become a real crypto user. Those who traded on Uniswap, registered ENS names, and donated to Gitcoin all received handsome rewards from the airdrop. You get the best yield in the world and take ownership of key agreements. By becoming a cryptocurrency user, you are preparing for a future bull market.

5. Make friends. A bear market is when the crypto community huddles together to keep warm during the crypto winter. Time to find your community and investment rhythm, these will pay off in various ways in the future, the real value of the crypto journey lies in the friends you make along the way.